“China Has Run Off The Cliff So Fast, People Seem To Think They’ll Make It To The Other Side”
by Tyler Durden
ZeroHedge.com
Dec 6, 2016
Some perspectives on the fascinating economic experiment that is China from Eric Peters, CIO of One Asset Management, as told in his traditional third-person style.
Anecdote: “We’ve become anesthetized to the absurdity of Chinese growth,” said the CIO.
The accelerating rate of credit expansion relative to GDP has no precedent. “They’ve run off the cliff so fast that people seem to think they’ll actually make it to the other side.”
China figured out the fiat currency game. “A government can monetize its debts, provided it avoids two extremes internal to its economy; inflation above the socially acceptable level of 5%, or deflation that leads to mass unemployment.”
So long as inflation remains within those bounds the Beijing Boys can stuff bad loans made to steel mills into the Great Wall Asset Management company, which is financed through a bond,
bought by some bank, guaranteed by the government.
The bad loan disappears in a monetary blur. This abuse of fiat currency has allowed China to grow in such an extraordinary and uninterrupted manner.
“But a government is also bound in their abuse of fiat by an external constraint – it can only monetize bad debts up to the point that this leads to uncontrolled capital outflows.”
Once monetization passes a threshold, people lose faith in money’s value and they sell it. Where that threshold lies remains a mystery of mass psychology. All we know is that faith is not something a government can undermine in a straight line, then stop on a dime. Loss of faith is one of mankind’s greatest non-linear phenomena.
“Money today is fairly electronic, so the Chinese can slow outflows with fifteen phone calls to their banks and money-launderers.” You can stop your companies from buying foreign firms too, which Beijing did this week.
“So China really comes unglued when inflation rises, when people start exchanging paper money for hard assets. Like real estate and commodities. Both of which have been surging beyond any fundamental justification.”
The Rest…HERE
